Learning to Day Trade - Part 2

Selecting Stocks and Analysis

When I was first starting I had a hard time finding the right stocks. I would search StockTwits, Twitter, and sometimes reddit for hot stocks other people were trading. This doesn’t work. Everyone you find on StockTwits is bullish, mostly because they are bag holding the stock and need people to buy and increase the price so they can sell. This is why you cut losses quickly and exit when the trade is going against you. So you don’t become one of those people.

The free way to find stocks:

  1. finviz
  2. Yahoo Finance
  3. thinkorswim (sign up to TD Ameritrade with $50 and withdraw the money then use the platform for free)
  4. Trader Workstation (requires an Interactive Brokers account and paid data)
  5. E-Trade Pro (not really free but if you’re using E-Trade Pro anyway then you might as well use it for scanning)
  6. Your broker.

Paid:

  1. StocksToTrade (has a $1 trial)
  2. EquityFeed (has a free trial)
  3. Trade Ideas

You can give the free trials a shot and see if you like what they offer - which is great. For myself, I don’t plan on using any of them until I’m profitable. I’m already seeing the best stocks at the open so they aren’t that useful for me currently.

One note about EquityFeed is that it does not currently support HiDPI displays very well on Windows. If you move it to a non-HiDPI monitor the text will look terrible and the charts are unreadable.

After Hours Scanning (at 8:00 PM EDT)

  • $1 to $30
  • 500K+ volume (ideally 1M+)
  • Up 5% or more
  • Ideally has a news catalyst (earnings, FDA approval, etc.) - finviz is great for finding stock news but your broker should also have a news section (I know TWS/ToS/and E-Trade all have it)

Premarket/During Market Hours

  • $1 to $30
  • 50K+ volume
  • $100K+ dollar volume
  • Ideally has a news catalyst

You can tweak any of these to fit your trading style. You may want to avoid stocks under $10 or ignore above $2. You can do whatever you want. I’ve heard Trade Ideas has the ability to scan for specific setups like “10 green 1 minute candles in a row”, but I’ve never used it. The paid options also have features to show you stocks making new highs. This is useful if you want to buy intraday breakouts.

Keep the stocks you find that made big moves on watch for several days. They can continue moving up/down for several days. See $LINU recently.

I’d recommend avoiding stocks under $0.01 (sub-penny stocks). You have to take like 10M share positions and most of them will be gone in a year. You won’t see these on finviz since they are on the OTC market and finviz only scans NYSE, AMEX (sometimes called scAMEX), and NASDAQ. Avoid illiquid stocks that only trade a few thousand shares per day!

It can be a bit overwhelming to watch 10+ stocks at once. If you narrow it down to 2-3 that are moving and watch just those it’s a bit easier. It helps to have at least two monitors or watch the charts condensed onto one monitor. You’ll have to figure out what you’re comfortable with and what works for you.

US Exchanges

  • NYSE

    • Respectable company’s
    • Not many penny stocks
    • Usually huge market caps
    • Moves are usually a lot slower and smaller
  • AMEX

    • Terrible spreads, I ignore this exchange and I don’t pay for data in IB for it
  • NASDAQ

    • Lots of penny stocks and real company’s
    • Good spreads
    • Lots of liquidity
    • Level 2 quotes are often manipulated, only useful when near a support/resistance level and even then it’s dependent on the individual stock
  • OTC / Pink Sheets

    • Pretty much all penny stocks
    • Developmental company’s
    • Most don’t file with the SEC
    • Level 2 quotes can help you find bottoms and tops
    • Do not believe a word they say in press releases, read the SEC filings
    • Slow executions, have to sell before the stock rolls over otherwise you probably won’t be able to get out

I seem to prefer NASDAQ. I’m not opposed to OTC but I rarely see anything good there. Especially since I use Interactive Brokers and the fees would be horrendus if I traded a 20c stock (it would cost $50 to buy 10,000 shares and another $50 to sell).

Only recently $MGTI popped up (around $3.80 a share at the time) and had several good opportunities. I did not capitalize on any of them even though I recognized some good dip buys as they occurred (Tim actually bought right after I recognized the bottom using level 2). It’s a learning process!

If I ever trade < $0.75 stocks it will be in E-Trade or TD Ameritrade so I can pay a flat $6.95 per trade vs. per share.

0.05c Spread/Tick Stocks

These are stocks that trade in 5 cent increments. You can tell it’s 5c tick by looking at the level 2 quotes. It will be a nice looking pretty list like so:

Bid x Ask
1.00 1.05
0.95 1.10
0.90 1.15
0.85 1.20

vs.

Bid x Ask
1.00 1.01
0.99 1.02
0.98 1.03
0.97 1.04

See the difference?

Normally you’d want to avoid these since as soon as you buy on the ask you are down 5c and they are also not as volatile. However, lately there have been a couple 5c tick stocks that have been making big moves. $8 up to $12+ in a day. They are very volatile but I have not traded one since the risk seems so high. It moves up a dollar then pulls back 50c. Crazy moves. You have to be on the right side of each move otherwise you could end up with a big loss.

Technical Indicators

Some useful ones are the 20 DMA, 50 DMA, and 200 DMA. These can act as support/resistance since a lot of traders use them. It’s not an exact science though. I do not use any other indicators currently and even these have not come into play for me.

VWAP can help guide you in determining if a stock is oversold or overbought. I haven’t really found it to be that useful personally.

You do not need any advanced indicators or to overload the crap out of your charts. I’ve seen people that fill their entire screen with indicators and they can’t even see the chart. You’re doing it wrong.

Most indicators are based on volume and price anyway. So if you load up your charts with 100 indicators, they will all be telling you the same thing anyway. I prefer candlesticks and volume to be present with the daily moving averages I listed above to be on the daily chart. Nothing else at the moment.

Support and Resistance

Marking support/resistance on your charts can be extremely useful. So many times have I witnessed stocks bounce off support that I marked months ago, or bumped into resistance and crashed. You can dip buy near support or short into resistance. It does not work all the time which is why you need to cut losses quickly, but it is very helpful. I do this in thinkorswim (using the price line tool) since the charts are very nice.

Resistance becomes support on the way up, support becomes resistance on the way down. Why does this happen? When a stock breaks out through resistance, buyers come in wanting to buy at the break out level. When a stock breaks down and cracks support, all of the people that bought above that support level are now under water. They want to get out break even or with a small loss/profit, so they become overhead resistance.

As it says in the Investopedia article, big fat round numbers like $1.00, $2.00, $3.00, and $1.50, $2.50, $3.50, etc. are very important. This is where people put their stop loss orders and sell orders. They want the easy math calculation. Buy at $1.00 and sell at $2.00, or buy at $2.00 and have a stop at $1.50 or $1.00.

I believe support and resistance to be the best “indicator”. Nothing is ever 100% in the stock market, but it certainly helps and can act as a guide.

Fundamentals

Most penny stocks are dumpster fires and have no real fundamentals. You can drive yourself insane trying to figure out the true value of a company. It’s generally not worth the effort.

News is a fundamental event so it does matter (earnings, FDA approval, etc.). Earnings releases come around 4 times per year (every quarter) and is probably the best catalyst. The earnings don’t even have to be good - as long as the stock reacts positively. Always trade the reaction to the news and never try to be the first to buy.

Never hold through an event like earnings or a conference call. Buy the rumor, sell the news. I held through the $3.00 drop on $AMD due to “MET” earnings. If I had sold the day before I would have had a nice profit, then I could have rebought near $10 (at multiday support) and scooped up more shares than I had before. Last quarter earnings for $AMD were a “BEAT” and the stock reacted positively for a day or two before dropping severely. I read how many people said it was “hard to hold through the drop”. Why? Why did you not sell before earnings or just after into the morning spike or when it failed to spike for days after? It will probably be at $18 or $20 eventually but not for a while. Holding on just so you can maximize your potential future profits is just silly. If you aren’t selling, you aren’t making money.

People have a hard time selling when they’re up after being down. Myself included. I almost didn’t sell at $14.50 (from my previous post). I thought, well I’m up more now so might as well just keep holding and hoping it goes higher. I did get out and guess what? It dropped to $12 and never got higher than my sell. Even with my recent position I struggled with this a little. I missed my $13.49 GTC sell by one penny at the open! It started to fade all day and I just got out at $13.22 for a small gain. It dropped further back down to $12.05. I missed that dip buy too which is annoying, but it’ll probably drop to that level again at some point.

Combining technical analysis (support/resistance) with a fundamental event can work really well.

Candlestick Charts

I like the 1 minute, 5 minute, and daily charts to be present when I’m looking at a stock. The 5 minute can allow you to see bottoms (a doji or hammer) where on the 1 minute it won’t be as easy to see. Unfortunately, I focus way too much time staring at the 1 minute and only realize that the stock bottomed after it moved and I look over at the 5 minute.

Futures

3 out of 4 stocks follow the overall market. If you are trading $AMD, you should know that it’s part of the S&P 500. This means that when the $SPY (S&P 500 ETF) is tanking, $AMD will usually follow suit and tank as well but sometimes delayed. This doesn’t matter as much for penny stocks, but it’s something to be aware of.

Stocks also occasionally follow each other or will run as a sympathy play. $AMD and $NVDA are sort of tied to each other. Several times I have seen them both react the same way and have eerily similar charts. This is probably caused by algorithmic trading.


Part 3 - Brokers



Disclaimer

I am not a registered financial adviser/broker/anything. Use this information for entertainment/informational purposes only. Any tickers mentioned are not recommendations to buy/sell/or sell short. They are used as examples only.